The Federal Housing Administration (FHA) has announced guidance intended to clarify circumstances under which residential properties encumbered by a Property Assessed Clean Energy (PACE) special assessment would be eligible for FHA-insured mortgage financing. The FHA announcement last week in Mortgagee Letter 2016-11 corresponds with a similar announcement in Circular 26-16-18 from the Department of Veterans Affairs (VA). The guidance from the FHA and VA are components of a White House initiative to make energy efficiency and renewable energy upgrades available to low- and moderate-income homeowners.

Improvements to residential properties under the PACE program are financed by private enterprises in conjunction with state and local governments. The covered improvements include energy efficiency, renewable energy, and water conservation upgrades to residential housing structures, as well as installation of solar power generation. The White House, in conjunction with the FHA and VA, intends PACE special assessments to be a component of an effort to provide an additional 1 gigawatt of solar power generation to low- and moderate-income families by 2020.

In order for a property to remain encumbered with a PACE assessment and be eligible for FHA- or VA-insured mortgage financing, certain requirements must be met:

(1) Under the laws of the state where the property is located, the PACE obligation is collected and secured by the creditor in the same manner as a special assessment against the property;

(2) The property may not be subject to an enforceable claim superior to the FHA- or VA-insured mortgage for the full outstanding PACE obligation at any time (but may be subject to an enforceable claim that is superior to the FHA- or VA-insured mortgage for delinquent, regularly scheduled PACE special assessment payments);

(3) No terms or conditions limit transfer of the property to a new homeowner;

(4) Public records must show the obligation amount, expiration date, and cause of expiration of the assessment, and in no case may default accelerate the expiration date; and

(5) In the event of a sale, the outstanding PACE obligation will continue with the property causing the new homeowner to be responsible for the payments on the outstanding PACE amount. Additionally, the PACE assessment must be factored into the underwriting and appraisal process.

The Mortgage Bankers Association (MBA) has expressed concern over the risks to the consumer and FHA over the guidance, detailed in an analysis of the guidelines. Pete Mills, MBA Senior Vice President of Residential Policy and Member Engagement, stated that the organization is "concerned that this program, as designed, would leave low- and moderate-income FHA borrowers more vulnerable to being misled and steered into financial obligations that they may not fully understand due to lack of disclosure. Further, the program puts taxpayers at risk by effectively making the FHA the guarantor of home improvement loans made by private contractors, thus increasing loss severity for the FHA program if borrowers default."

The changes to the HUD Single Family Housing Policy Handbook that accompany Mortgagee Letter 2016-11 will become effective 60 days after the date of the guidance letter; however, mortgagees may begin using the policy immediately.

Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions.


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